By Dana Anspach
[…] The Roth accounts offer a fantastic way to accumulate money tax-free. New tax laws make Roth accounts look better than ever.
The Tax Cut & Jobs Act lowered marginal tax rates, but, those rates revert to higher levels in 2026. No one knows if this will happen or not. Right now, according to the law, it will. If it does, we may never see tax rates this low again. That means getting money into tax-free vehicles now can turn into a significant boost to your after-tax wealth later.
With the potential for higher tax rates in 2026 and beyond, funding accounts such as the Roth IRA and Designated 401(k) Roth accounts, where money grows tax-free and assuming you follow the rules, is tax-free upon withdrawal, is more important than ever. Because when you withdraw those funds, rates may be much higher than they are today. Higher future rates are particularly likely to hit retirees as they reach age 70.
Many retirees are caught off guard by higher taxes when, at age 70-½, their required minimum distributions (RMDs) begin. At that age, an IRS dictated formula tells you the minimum amount you must take out of retirement accounts — and, for most people, the entire required withdrawal counts as taxable income. This extra income on the tax return often pushes some of the retiree’s income into the next higher marginal tax rate, can make more of their Social Security taxable, and in many cases, may cause them to pay higher Medicare Part B premiums. RMDs can create a delayed tax-bomb. Add on higher rates when that bomb hits, and ouch, your take-home pay in retirement can take a big hit.
Many people retire in their late 50s or early 60s, years before RMDs begin, which creates a window of time where tax planning opportunities abound. Research by firms like Vanguard, Morningstar, and LifeYield, shows actively engaging in tax planning can boost your after-tax income in retirement by a meaningful amount.
With lower rates now, you can engage in tax arbitrage.